How to Finance a Property Purchase
Nov 25, 2020
When you’re getting into property investment you need one of two things:
- A reasonable cash pot as the deposit for your first property
- A means of financing the deposit for your first purchase
The days of 100% mortgages are long gone and for most people that means a 25% deposit. If you’re in the south east, that could be a fairly big wedge of money, with property prices within London commuting distance. So, without a cash pot, what are your options?
The first one most people think of is a joint venture (JV) with someone else’s money to finance the deposit. There are all kinds of challenges to this:
- You must satisfy the Financial Conduct Authority that your JV partner is what is known as a ‘sophisticated investor’. In other words, they know what they’re getting into.
- You’ll need to either be completely sure your JV partner won’t change their mind and what their cash back at a critical time
- Your JV partner probably won’t expect to do any of the work - but will want a big chunk of the profits when they get their money out.
- Unless you’ve agreed up front that the JV partner will invest enough for the deposit AND put money into the refurb, you will need enough cash to cover all the refurb costs.
And that’s just the tip of the iceberg. Ask anyone who has experience of JVs and you’ll hear plenty of tales of woe.
The other side of this is that once the money has been invested in a property, it’s stuck in the property until you can remortgage. Remortgaging within 6 months won’t do your credit rating any good - lenders don’t like people who redeem their mortgage too soon.
That means that, unless you plan to sell, your JV money is stuck in the property until it earns enough from rent to repay your JV partner.
There must be a better way
There are some strategies that will circumnavigate these problems. They’re all based on using bridging finance as your means of financing your purchase. Why is this better?
- If you choose the right bridger, you can borrow against full market value, regardless of what you actually paid for the property. So if you’re a good negotiator and can find a motivated lender, you could need a far smaller deposit than any mortgage lender will ask for.
- The FCA don’t need you to prove a bridging lender qualifies as a sophisticated investor.
- The bridging lender will not change their mind part way through the project.
- The bridging lender will not demand up to 50% of your profits. Yes, it’s more expensive than a mortgage, but far less expensive than a JV.
- Depending on the lender you choose, a bridger will often be willing to advance additional funds, in stages as the value of the property increases.
There is more - but this should be enough to whet your appetite. There are lots of bridging tips on my YouTube channel.
You can learn more here: